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Underweight on Brokerages – Deutsche

August 26, 2008

Deutsche Bank [DB] is underweight on Indian brokerage stocks [Emkay, Motilal Oswal, Geojit etc] especially Indiainfoline and Edelweiss where they have recommended a SELL. DB compares the premium P/E at which these stocks are quoting to their peers across Asia where they are all trading at discount. This is very different from exchanges, which are also turnover-dependent but trade at market premiums since they are oligopolistic businesses.

A fragmented market, structural weaknesses such as relatively low product diversity and a distinct reversal of both the trend and the cyclical component, could lead to a significant de-rating from current above-market multiples. The sector is thinly covered by the Street; DB estimates and target price are materially below consensus.

The low market concentration and hence the propensity to intensely compete could exert significant pressure on returns. To this end, distribution prowess becomes the main value-driver and, with players such as Reliance Money taking the lead in network expansion, the crucial process of scaling up could be harder for rivals. DB expects turnover velocity to further compress in FY09E, the key retardant being the unavailability of large IPOs which have been an important driver of velocity in the past.

India Infoline is expected to report a negative growth in EPS for FY09 to Rs 5.23 [Rs 6.03 FY08] DB has a sell rating on the stock with a target price of Rs 110. [Broking/Investment banking/Wealth management/Ins distribution etc Rs 75 and Consumer Finance Rs 35.]

Edelweiss Capital is expected to report an EPS of Rs 33.83 [negative growth Rs 42.30 FY08] DB has set a target price of Rs 480 [ Broking/Investment banking/Wealth management etc Rs 265, Consumer Finance Rs 71, private Equity Rs 19 and Arbitrage Business Rs 127]

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